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Tobacco money seen as key to aid for Detroit

When Gov. Rick Snyder unveils his budget proposal to the Legislature next month, intertwined will be the budgetary details for the state's offer to contribute $350 million over 20 years to help resolve Detroit's bankruptcy.

Snyder has been adamant from the start that the settlement offer is not bailout money but a way to get to consensus on two big obstacles: softening the financial impact to city pensioners who are going to see cuts to retirement income and protecting the collection at the Detroit Institute of Arts.

"This is not geared toward taking care of bondholders, bankers or people on Wall Street," Snyder said. "This is geared toward Michiganders that worked really hard in our state and now have a pension and are looking at a difficult situation."

Snyder and legislative leaders also acknowledged last week that it will be difficult to find the votes to make the state assistance happen, but they are committed to doing so in the coming months.

The $350 million proposal will require separate legislative action to divert $17.5 million annually for 20 years from the state's tobacco settlement fund. This fiscal year, the state will receive $253.5 million from the settlement; in fiscal 2015, it will receive $250.9 million.

A large portion of the tobacco money each year is already spoken for: $75 million is funneled into the 21st Century Jobs Trust Fund, $53 million goes toward securitization payments and $22 million goes to credits for manufacturers, said Kurt Weiss, a spokesman for the Michigan Department of Technology, Management and Budget.

When those and other items are factored out, the state had $53.2 million in the current fiscal year to spend on initiatives when the money was placed into the general fund.

Gov. Rick Snyder

In an interview with Crain's, Snyder said his plan is not to pull the $17.5 million each year from the net revenue from the settlement but to look at the entire annual amount the state receives and reallocate it accordingly.

While this settlement proposal for Detroit would be on a separate track from the budget, Snyder said he will take it into account when he crafts his state budget proposal. He will have to decide whether to continue to fully fund any programs that the tobacco settlement money was previously used to fund.

There are several benefits to using the tobacco fund money, Snyder said. Chief among them: It is a reliable revenue source.

Michigan started receiving money from the tobacco settlement in 2000 and it will go on in perpetuity. The exact amount fluctuates each year. Michigan receives 4.35 percent of the national annual amount, which is adjusted each year for inflation and the number of cigarettes sold in the U.S. The money is distributed to the states each year on April 15.

Snyder said the state also could offer a bond that would be securitized with the settlement money.

The idea for a 20-year bond came out of the mediation surrounding the city's bankruptcy, he said. A group of 10 state and national foundations that has pledged to come up with $330 million has talked about its contributions coming in over 20 years.

"They are to be commended," Snyder said of the efforts made by the foundations in an act he described as unprecedented.

The governor said he hopes other individuals and foundations will see what others are doing and join the effort.

Snyder said he would strongly encourage the DIA itself to contribute financially to the plan but wouldn't specify at what level.

Senate Majority Leader Randy Richardville, R-Monroe, and House Speaker Jase Bolger, R-Marshall, stood with Snyder as he announced the proposal last week and said they were open to working on it. The two Democratic leaders also announced their interest in learning more about the proposal and trying to help the pensioners.

Randy Richardville, R-Monroe

That support was noted by the federal mediators in a statement Thursday, calling it another important step toward having Detroit promptly and successfully exit from bankruptcy.

Richardville said the Senate will consider the idea over the next few weeks. Whatever final proposal is brought forward, his members want to make sure Detroit does not end up in a similar situation a few years down the road, he said.

"All we have agreed to is to take a hard look at it, vet it publicly, and make sure we are very thorough," Richardville said.

Bolger said he is dedicated to working on the plan and thinks the offer is right, not just for the pensioners from Detroit but for the rest of the state.

Rep. Thomas Stallworth III, D-Detroit and chairman of the Detroit caucus, said the conversations and proposals so far are a good start.

"I think with the nonprofit community, the governor's office, leadership in both houses are committed to a settlement rather than go through a full-blown bankruptcy, I think it's a positive step," he said.